The IMF’s Outlook for Global Growth
Twice a year the IMF has major meetings: in April and October, attended by central bankers and finance ministers, as well as by representatives of the financial community. These gatherings are good for gauging the mood of the moment and also include the IMF’s release of its latest economic thinking. In addition, at the start of the year the IMF provides an update on its forecasts.
In the years since the financial crisis, the IMF has tended to revise down its forecasts as the year has progressed. Then last autumn and at the start of this year they kept their forecast for growth in 2017 unchanged at 3.1%. This suggested that global growth was stabilising. At this recent spring meeting, as we suspected it would, the IMF raised its forecast for global growth from 3.1% to 3.5% for 2017. It also expects growth to be solid next year at 3.6%. These are high rates of growth and represent a significant pick-up from last year, as highlighted in the table below.
The IMF’s thinking: a solid benchmark
Now, it has to be said, that the IMF is not always a great forecaster, but the reason we take seriously what it says is that it is a good benchmark of where consensus thinking is on global growth. Also, even though it may not always get its forecasts correct, the analysis that underpins them is always interesting to read. At the very least, we can see where it envisages future risks. One country it was too pessimistic about before was the UK, and it has now revised up its growth forecast for 2017.
According to the IMF, the world economy may be "at a turning pointing to better times ahead”. As the IMF said, the pick-up in manufacturing, industrial production and trade points to this year and next being "substantially better than 2016".
Here are the latest IMF GDP growth projections:
Debt dynamics in the West
Since last summer, financial markets have focused on a ‘reflation trade’, with stronger growth and temporarily higher inflation across Western economies. This has allowed equities to rally and, despite the pick-up in inflation, interest rates and yields have stayed relatively low. This is despite the US Federal Reserve having increased interest rates once this year already. The markets’ performance has been justified by recent economic data and appears now to be endorsed by the IMF’s latest views.
One ongoing concern has to be high public sector debt levels. But higher growth and inflation mean that nominal GDP (which is economic growth and inflation added together) is also higher. This in turn improves the debt dynamics for most countries, especially if interest rates are expected to stay low. Financial markets have yet to take on board fully this potential for debt numbers to improve and, if they do, then the recent strong performance of many markets could be sustained.
Even though inflation is higher, in Western economies it is unlikely this will be sustained. For instance, in the UK domestic cost and wage pressures are subdued – and likewise in other countries. Oil prices are firm, around their two year highs, just above $50 a barrel.
What are the medium-term risks to growth?
The issue for markets is how sustainable is this growth? For the IMF it is trade frictions, political uncertainty and debt problems in China that pose medium-term risks. These are valid concerns but they do not appear to be imminent problems. Thus we should keep them on our radar screen – as we do – but not view them as the dominant drivers of economic or financial market performance.
Perhaps more pertinent is the issue we have mentioned before: whether the US and UK economies may slow because of where they are in the economic cycle. Indeed, in recent weeks, markets are no longer convinced that the Fed will raise interest rates two further times this year because of softer recent US economic data.
There has recently been a divergence in data across a number of economies. Recent figures would suggest the US and UK are in the slowing camp, while emerging economies are in the improving group. The solid recovery seen so far in the world economy helps justify the improved performance of equities. Despite this - and the upward revision from the IMF - the recent diverging economic news across some economies suggests many reasons for investors and savers to remain vigilant.